Lululemon Athletica Inc. Form 10-Q Summary
Period: Fiscal third quarter and first three quarters ended November 3, 2019, compared with October 28, 2018. The supplied metadata labels this as “2018 Q3,” but the filing is the fiscal 2019 third-quarter Form 10-Q. The company designs, distributes, and sells athletic apparel and accessories through company-operated stores, e-commerce, outlets, temporary locations, wholesale accounts, and licensing arrangements. Company-operated stores increased to 479 from 440 at February 3, 2019.
Financial Results and Key Metrics
| Metric | Q3 2019 | Q3 2018 | First 3 Quarters 2019 | First 3 Quarters 2018 |
|---|---|---|---|---|
| Net revenue | $916.1 million | $747.7 million | $2.582 billion | $2.121 billion |
| Gross profit | $505.0 million | $406.8 million | $1.413 billion | $1.148 billion |
| Gross margin | 55.1% | 54.4% | 54.7% | 54.1% |
| Income from operations | $175.8 million | $135.9 million | $472.6 million | $374.4 million |
| Operating margin | 19.2% | 18.2% | 18.3% | 17.7% |
| Net income | $126.0 million | $94.4 million | $347.6 million | $265.3 million |
| Diluted EPS | $0.96 | $0.71 | $2.65 | $1.97 |
- Q3 revenue increased 23%; first-three-quarter revenue increased 22%. On a constant-dollar basis, growth was 23% for both periods.
- Q3 total comparable sales increased 16%, or 17% in constant dollars. Comparable store sales increased 10%, while direct-to-consumer revenue increased 29%.
- Q3 gross margin expanded 70 basis points, primarily from lower product costs, favorable product mix, and lower markdowns.
- SG&A increased 22% in Q3 but declined to 35.9% of revenue from 36.2%; stock-based compensation expense for the first three quarters was $36.1 million.
- First-three-quarter effective tax rate was 27.4%, compared with 30.4% in the prior-year period. The prior-year period included a $5.2 million U.S. tax-reform transition-tax adjustment.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $586.2 million at November 3, 2019, down from $881.3 million at February 3, 2019.
- Operating cash flow was $95.1 million for the first three quarters, compared with $316.9 million in the prior-year period. The decline primarily reflected higher inventory purchases, income-tax payments, and changes in other operating assets and liabilities.
- Capital expenditures were $214.2 million, primarily for new and remodeled stores, information technology, and corporate infrastructure. Investing cash flow was negative $212.5 million.
- Financing cash flow was negative $179.6 million, including $173.1 million for repurchases of 1.1 million shares. Remaining repurchase authorization was $327.6 million at November 3, 2019.
- The company had no borrowings under its $400 million unsecured revolving credit facility and had $2.0 million of letters of credit outstanding. Reported available capacity was $398.0 million.
- Working capital excluding cash and cash equivalents was $290.8 million. The company stated that cash, operating cash flow, and available revolver capacity should meet liquidity and capital requirements for at least the next 12 months.
- Adoption of ASC 842 resulted in recognition of $652.5 million of right-of-use lease assets and $695.3 million of current and non-current lease liabilities at November 3, 2019. This materially changed the balance sheet presentation without a cumulative earnings adjustment.
Material Changes and Management Commentary
- Growth was driven by new stores, increased store traffic, higher website traffic, and expansion of international operations. Fifty-three net new company-operated stores were opened since the third quarter of fiscal 2018.
- Direct-to-consumer revenue grew faster than store revenue, increasing its share of total revenue to 26.9% in Q3 from 25.3% in the prior-year quarter.
- Gross margin benefited from a 120-basis-point improvement in product margin, partly offset by higher distribution and product-department costs and unfavorable foreign exchange.
- Foreign exchange and derivative revaluation losses recorded in SG&A were $3.3 million for the first three quarters, compared with $4.3 million of net losses in the prior-year period.
- The company reported no specific full-year financial guidance in the supplied filing text. Management emphasized continued store expansion, e-commerce growth, international expansion, and investments in technology and infrastructure.
- Retail seasonality remains significant: management expects a substantial portion of annual revenue and operating profit to occur in the fourth fiscal quarter due to holiday sales.
Risks, Contingencies, and Unusual Items
- Key risks include brand and product reputation, intense athletic-apparel competition, consumer demand, inventory forecasting, supplier and manufacturing concentration, raw-material costs, tariffs and trade restrictions, foreign exchange, cybersecurity, e-commerce and information-technology disruptions, international expansion, and long-term lease commitments.
- The company relies on approximately 65 fabric suppliers and 44 manufacturing vendors; the filing states that five manufacturing vendors produced approximately 60% of fiscal 2018 products.
- Pending legal matters include a New York wage-and-hour class action and a Delaware derivative action concerning alleged fiduciary-duty breaches and matters related to a former executive’s departure. The company intends to defend the matters and states that current proceedings are not expected to have a material adverse effect, although potential damages are unspecified.
- Forward currency contracts had gross notional amounts of $437.0 million at November 3, 2019, including $196.0 million designated as net investment hedges and $241.0 million not designated as hedges.
- A 10% appreciation of the U.S. dollar against the Canadian dollar, assuming other conditions remained constant, would have reduced first-three-quarter operating income by approximately $3.9 million.
Facts Investors Should Verify
- Reconcile the strong earnings and revenue growth with the substantial decline in operating cash flow and the increase in inventory to $627.1 million from $404.8 million at fiscal year-end.
- Assess whether comparable-sales momentum, particularly 29% Q3 direct-to-consumer growth, is sustainable after the holiday season and amid increased digital and distribution costs.
- Evaluate the effect of ASC 842 lease liabilities, long-term store commitments, and planned store expansion on future fixed costs and returns on invested capital.
- Monitor remaining share-repurchase authorization of $327.6 million, capital-expenditure requirements, and the pace of cash depletion.
- Review exposure to supplier concentration, tariffs, foreign exchange, cybersecurity, product quality, and the pending legal proceedings.
- Confirm subsequent-quarter results and any formal full-year guidance, as no clear numerical guidance is provided in this filing text.